Suppose a professional sports team convinces a former player to come out of retirement and play for three seasons.They offer the player $2 million in year 1,$3 million in year 2,and $4 million in year 3.Assuming end of year payments of the salary,how would we find the value of his contract today if the player has a discount rate of 12%?

Question

Quizplus · Accepted Answer

To find the value of the contract today, we need to find the present value of each year's payment and add them up. Using the formula for present value, we get:

PV(year 1 payment) = $2 million / (1 + 0.12)^1 = $1.79 million
PV(year 2 payment) = $3 million / (1 + 0.12)^2 = $2.09 million
PV(year 3 payment) = $4 million / (1 + 0.12)^3 = $2.25 million

The total present value of the contract is the sum of these:

PV(total) = $1.79 million + $2.09 million + $2.25 million = $6.13 million

Therefore, the answer is C.

Suppose a Professional Sports Team Convinces a Former Player to Come